Treasuries: Negotiable Debt Obligations of the U.S. Government

August 25, 2024 3 min read Economics Finance Investments Treasuries Treasury Bill Treasury Bond Treasury Note Government Securities

Treasuries are negotiable debt obligations of the U.S. government, secured by its full faith and credit. They are issued at various schedules and maturities, and their income is exempt from state and local, but not federal, taxes.

On this page

Treasuries are negotiable debt obligations issued by the U.S. government, secured by its [full faith and credit](https://www(dictionary.com/browse/full-faith-and-credit). They serve as a fundamental part of both the domestic and international financial systems and are commonly used as a benchmark for risk-free investments.

Types of Treasuries

Treasury Bills (T-Bills)

Treasury bills are short-term securities that mature within one year. They are sold at a discount to their face value and do not pay interest prior to maturity. Instead, the yield is determined by the difference between the purchase price and the face value paid at maturity.

Example: A $10,000 T-Bill bought for $9,800 will pay $10,000 at maturity, providing a profit of $200.

Treasury Notes (T-Notes)

Treasury notes have maturities ranging from one year to ten years and pay interest every six months. The yields on these notes are used as a benchmark for other interest rates.

Example: A 5-year T-Note might have a face value of $1,000 and pay a semi-annual interest (coupon) rate of 2%.

Treasury Bonds (T-Bonds)

Treasury bonds have the longest maturities, ranging from 20 to 30 years, and also pay interest semi-annually. They are critical for long-term financial planning and investment strategies.

Example: A 30-year T-Bond has a face value of $1,000 and pays a coupon rate semi-annually over the investment period.

Special Considerations

Tax Exemption

The interest earned on U.S. Treasury securities is exempt from state and local taxes. However, it remains subject to federal taxation.

Security and Reliability

Treasuries are considered one of the safest investments, backed by the U.S. government’s credit. This security makes them a preferred choice for conservative investors and those seeking minimal risk.

Historical Context

Treasuries have evolved significantly since their introduction. Initially employed during times of war, their role expanded to include funding government expenditures and managing the country’s fiscal policy.

Treasury Bill vs. Treasury Bond vs. Treasury Note

Time Horizon: T-Bills are short-term, T-Notes are medium-term, and T-Bonds are long-term.
Interest Payment: T-Bills are sold at a discount and mature at face value, while T-Notes and T-Bonds pay semi-annual interest.

Municipal Bonds: Debt securities issued by state or local governments.
Corporate Bonds: Issued by companies to raise financing.

FAQs

How are treasury securities sold?

Treasury securities are sold via auction by the U.S. Treasury, either directly to investors or through financial institutions.

Can treasuries be sold before maturity?

Yes, treasuries can be sold before maturity in the secondary market, where their value may fluctuate based on interest rates.

What is the impact of interest rates on treasury prices?

When interest rates rise, the prices of existing treasuries usually fall, and vice versa. This inverse relationship is crucial for investors to understand.

References and Additional Reading

U.S. Department of the Treasury. (n.d.). Treasury Securities.
Federal Reserve Bank of St. Louis. (n.d.). FRED Economic Data.

Summary

Treasuries are instrumental in the financial ecosystem, providing a secure investment option backed by the U.S. government’s full faith and credit. They come in various forms—T-Bills, T-Notes, and T-Bonds—each catering to different investment needs and time horizons. Understanding these instruments is crucial for navigating both personal finance and broader economic landscapes.